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Coronavirus Mars Silver Mining Industry's Near-Term Outlook

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The Zacks Mining - Silver industry comprises companies that are engaged in silver mining, which include big and small players operating mines of widely varying types and scale. The mining, processing, development and mineral exploration activities are subject to several laws governing development, prospecting, production, taxes, labor standards and environmental regulation in various jurisdictions in which these companies operate.
 
Let's take a look at the three major themes in the industry:
 

  • Silver’s unrivaled characteristics make it an indispensable component for many industrial products. In fact, industrial applications account for roughly 60% of the global silver consumption. Consequently, with the coronavirus outbreak taking the shape of pandemic, apprehensions regarding its impact on global economy and industrial activity is taking the sheen off silver. Silver prices have thus declined 3.6% so far this year.
     
  • The Mining - Silver industry faces escalating production costs including electricity, wages, water and materials. With no control over silver prices, the industry has to focus on improving sales volumes while being cost-effective. The companies are investing more than ever in R&D and resorting to technological innovations targeted at nearly every level of operation to increase efficiency, sustain growth and keep costs low.
     
  • The ongoing revolution in green technologies, aided by exponential growth of new energy vehicles and investment in solar photovoltaic energy, will act as a major catalyst going forward. Silver’s use in 5G-infrastructure and upcoming intelligent electronics is also likely to fuel demand. Demand in jewelry fabrication, which accounts for approximately one-fifth of total silver demand, is also expected to increase. India will emerge as a major consumer courtesy of increasing investor interest and growth in jewelry, decorative items and silverware fabrication. Silver also serves as a safe haven asset in times of uncertainty.

Zacks Industry Rank Indicates Dismal Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy prospects in the near term. The Zacks Mining - Silver Industry, which is an 11-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #236, which places it at the bottom 7% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Over a year’s time, the industry’s earnings estimate for the current year has gone down 28%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Versus Broader Market

The Mining- Silver Industry has outperformed the S&P 500 over the past year. The stocks in this industry have collectively gained 11.2% in the past year compared with the Zacks S&P 500’s growth of 6.3%. Meanwhile, the Zacks Basic Material Sector declined 17.1% over the past year.

One-Year Price Performance



Mining- Silver Industry’s Valuation

On the basis of trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing silver-mining companies, we see that the industry is currently trading at 13.2X compared with the S&P 500’s 10.9X. However, the industry is trading above the Basic Material sector’s trailing 12-month EV/EBITDA of 9.0X. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio



Enterprise Value/EBITDA (EV/EBITDA) TTM Ratio



Over the last five years, the industry has traded as high as 27.8X and as low as 9.6X, with the median being at 14.2X.

Bottom Line

While the impact of the coronavirus outbreak remains an overhang, demand for silver will rebound once the situation stabilizes. Rising industrial demand and broader economic growth present solid prospects in the silver mining space. With expanding uses in technology, demand for silver continues to rise.

None of the stocks in the industry currently carry a Zacks Rank #1 (Strong Buy). We are presenting two stocks with a Zacks Rank #2 (Buy) and three stocks with a Zacks Rank #3 (Hold) that investors may take a look at. You can see the complete list of today’s Zacks #1 Rank stocks here.

Fresnillo Plc (FNLPF - Free Report) : Based in Mexico, the company currently carries a Zacks Rank #2. The Zacks Consensus Estimate for earnings for fiscal 2020 projects year-over-year growth of 26%. The estimate has moved up 107% over the past 60 days.

Price: FNLPF



Great Panther Silver Limited (GPL - Free Report) : This Vancouver, Canada-based company carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2020 earnings has gone up 60% over the past 60 days. The estimate indicates a year-over-year growth of 175%.

Price and Consensus: GPL



Hecla Mining Company (HL - Free Report) : This Coeur d'Alene, ID-based company carries a Zacks Rank #3.  The Zacks Consensus Estimate for earnings for fiscal 2020 projects year-over-year growth of 123%. The company has a long-term estimated earnings growth rate of 1%.

Price and Consensus: HL



MAG Silver Corp. (MAG - Free Report) : The Zacks Consensus Estimate for this Vancouver, Canada-based company for fiscal 2020 earnings indicates year-over-year growth of 975%. The stock currently carries a Zacks Rank #3.

Price and Consensus: MAG



Pan American Silver Corp. (PAAS - Free Report) : This Vancouver, Canada-based company has an estimated long-term earnings growth rate of 4%. The stock carries a Zacks Rank #3. The company has a trailing four-quarter earnings surprise of 103%, on average.

Price and Consensus: PAAS



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